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Tether USD₮ and US Treasury Dynamics

The United States, despite much hand wringing to the contrary, is still the dominant superpower among nations. It wields tremendous geopolitical influence, and has the deepest capital markets of any country by a large margin. As a result, US treasury bonds function as global reserve assets underpinning capital markets around the globe. All nations hold US Treasuries as part of their balance sheet, and foreign ownership of US Treasuries amounts to roughly half of publicly held US Treasuries. Private investors own the other half of the ‘publicly held’ portion. The Federal Reserve owns the rest of total outstanding treasuries.

The sale of US Treasuries is how the United States Government (USG) finances its own operations.  As such, the issuance and sale of US Treasuries is essential to the functioning of the USG and the health of the US as a nation. Treasuries are bought by the FED when newly printed money needs to be injected into the market according to the US monetary policy objective (stimulus) or sold when the supply of money in circulation is considered excessively high (to fight against inflation).

As of 2020, the Federal Reserve owned roughly 1 out of every 2 issued treasury bonds in circulation. This represents a scenario where the US needed to finance its own deficit instead of having natural demand via private investors who wanted to hold US public debt (the Federal Reserve also bought treasuries to stimulate the economy).

The best scenario for a sovereign nation is to have all of its debt purchased by private investors and not be in need to finance any of its deficit via its central bank. However, this has not been feasible for the United States, or for any other nations. The second best scenario is to have strong demand for national debt from private investors and only need to finance the smallest portion of the debt possible.

Foreign Demand for Treasuries is Slipping

Foreign demand for US Treasuries was historically strong and growing, even after the 2008 financial crisis. Foreign investors doubled their holdings of US debt during the following 6 years. However, as of 2016 this trend slowed and even reversed in several key ways.

Since 2016 total foreign ownership of US debt has only grown 14% while total US debt grew 40% during that same time period. Another way of showing this is that during 2016 foreign nations owned 32% of all US debt, and as of 2023 they only own 22%.

China is Shedding US Treasuries

At one point China alone owned $1.3 trillion of US debt, a figure which at the time placed it close to owning 10% of all US debt. However, China has been selling off its US treasury exposure since 2013, with a sharp acceleration around the COVID crisis. It now holds its lowest levels of US debt in the last 14 years (even as the total amount of US debt has grown substantially).

US Debt Issuance Set to Increase

Adding to this dynamic, US debt issuance and borrowing is projected only to increase over the coming decades. The US needs to finance increasingly large entitlement obligations (social security and Medicaid, and wants to pay for reshoring industry and large investments in green energy infrastructure. None of these goals are possible without an increase in borrowing.

Even the Congressional Budget Office expects deficits to grow and borrowing to increase.

Tether as a Buyer of US Treasuries

Tether has recently emerged as a top 22 buyer of US Treasuries due to the demand for USD₮ globally among emerging markets and within crypto markets. As of Tether’s most recent attestation by BDO, Tether holds directly, indirectly, or as Reverse repos’ collateral over $72.5bn in US Treasuries. This size is higher than in countries like Mexico, Spain, and the UAE.

More notably, Tether’s ability to buy US Treasuries has the potential to grow rapidly as more people around the world use US Treasuries to access dollars. In fact, Tether highlighted the unique ability for USD₮ to satisfy global demand for dollars by converting dollar demand into treasuries a year ago. Simply issuing more dollars doesn’t create demand for US debt, but USD₮ demand does.

Further, Tether provides a call option for the US on the success of crypto markets. If crypto does succeed as a global financial system, then demand for USD₮ is likely to increase exponentially, causing a sharp increase in US Treasury buying from Tether.

These factors make Tether a relatively unique and significant buyer of US Treasuries among the basket of current treasury buyers. Tether is able to produce a unique source of treasury demand while strengthening the role of the US dollar globally. As foreign purchasing of treasuries declines, and issuance of US debt is slated to increase, Tether is able to help support US and global financial stability.

While a portion of the mainstream media still have a hard time understanding some simple facts, Tether has quickly become the most important player in emerging markets and developing countries and has dramatically increased US Dollar adoption in communities that never had access to the dollar. In fact, globally, the estimated number of unbanked people has surpassed the 3 billion mark.

It means that in order to support themselves and their families, these people can only rely on cash and currencies that often quickly lose their value against the dollar, as is the case with Argentina, Turkey, and others. The common denominator of each one of these communities is their desire to save in US Dollars, to protect their wealth, and to keep providing for their families. The banking industry deems most of these communities and countries non-profitable, hence they are left alone.

Tether USD₮ is the solution. It’s a lifeline for many, its demand is growing by the day, reflecting a corresponding growing demand and purchase of new US Treasuries. 

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